Public Investment in Resource-Abundant Developing Countries

By Andrew Berg, Rafael A Portillo, Susan S. Yang, Luis-Felipe Zanna

November 15, 2012

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Andrew Berg, Rafael A Portillo, Susan S. Yang, and Luis-Felipe Zanna. Public Investment in Resource-Abundant Developing Countries, (USA: International Monetary Fund, 2012) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

Natural resource revenues provide a valuable source to finance public investment in developing countries, which frequently face borrowing constraints and tax revenue mobilization problems. This paper develops a dynamic stochastic small open economy model to analyze the macroeconomic effects of investing natural resource revenues, making explicit the role of pervasive features in these countries including public investment inefficiency, absorptive capacity constraints, Dutch disease, and financing needs to sustain capital. Revenue exhaustibility raises medium-term issues of how to sustain capital built during a windfall, while revenue volatility raises short-term concerns about macroeconomic instability. Using the model, country applications show how combining public investment with a resource fund---a sustainable investing approach---can help address the macroeconomic problems associated with both exhaustibility and volatility. The applications also demonstrate how the model can be used to determine the appropriate magnitude of the investment scaling-up (accounting for the financing needs to sustain capital) and the adequate size of a stabilization fund (buffer).

Subject: Consumption, Consumption taxes, Expenditure, National accounts, Private consumption, Public investment spending, Taxes

Keywords: Adjustment cost, Consumption, Consumption taxes, Depreciation rate, DSGE models, Investing approach, Investment efficiency, Investment path, Investment project, Investment scaling-up, Investment spending, Natural resource, Private consumption, Public investment, Public investment spending, Resource revenue, Resource-rich developing countries, Stabilization fund, Sub-Saharan Africa, WP

Publication Details

Pages:

48
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2012/274
Stock No:

WPIEA2012274
ISBN:

9781475535563
ISSN:

1018-5941

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